San Francisco is one of the top-performing real estate markets in the world. As a result of the strong economy and high-paying jobs in the tech industry, property values have steadily risen over the past 35+ years. This means that the barriers to entry are much higher than in other markets.
Nevertheless, for qualified homebuyers and investors, San Francisco real estate offers unmatched growth and lifestyle opportunities. Those who can take advantage of present uncertainty due to COVID-19 will be in prime position for the future.
Here is why you should invest in San Francisco real estate:
1. Return on Investment
Over the past few decades, the growth in San Francisco property values is unparalleled. As the graph below shows, local home prices appreciate quickly and dramatically during periods of economic growth. On the other hand, slowdowns and recessions lead to temporary, proportionally smaller dips in value:
Buying A Residence
Let’s apply the data above to a real-life situation. Say you purchased a home in San Francisco in 2001, just after the birth of a child, for $1,000,000. If you were to sell the house when your child graduated from high school in 2019, the expected sale price would be: $1,000,000 x (1.59) x (0.73) x (1.88) = $2,182,116
…with a Return on Investment of: ($2,182,116 – $1,000,000) / ($1,000,000) = 118.2%
Given the 44.4% cumulative rate of inflation between 2001 and 2019, your Real Rate of Return would be: (118.2%) – (44.4%) = 73.8%
It is early to say exactly how much of an effect the COVID-19 pandemic will have on local property values. However, as of February, local housing prices have fallen to where they were in November 2017. In other words, this is a great time to take advantage of present uncertainty:
Buying A Rental Property
For investors, the high appreciation outlined above shows the promise of San Francisco real estate as an asset. However, for those able to cover the high up-front costs, it can also be a lucrative source of rental income.
First of all, demand for rental properties is very high. Above all, the tech industry has attracted talent from around the world for high-paying jobs (more on this below). This has led to a median household income in the city of $104,552 between 2014-18 according to U.S. government data. However, SmartAsset reports that San Francisco has an overall Price to Rent ratio of over 50. Despite high incomes, it is still significantly cheaper to rent than own in San Francisco.
Monthly rental income depends on many factors, including location, number of units, build quality, and amenities. One study from 2019 shows that the median property price in San Francisco at that time was $1,566,399, with a median rental income was $4,376. But certain San Francisco neighborhoods are much higher performing than the median. For example, according to the same study, the median property price in the South of Market (SoMa) district was much lower than the city median at $881,095, and yet the median rental income was significantly higher at $4,821. For this neighborhood, Mashvisor calculates a robust Cap Rate of 6.1%. Based on your unique needs, we would be happy to advise on suitable high-return opportunities.
2. Economic Prospects
The growth in San Francisco property values over time reflects the strength of the local business climate. Many of the world’s largest technology companies, including Apple, Facebook, Google and others are located in or near the city. This concentration of economic activity certainly reflects the local abundance of entrepreneurialism, skilled workers, and venture capital. So it was not a surprise that San Francisco was named #1 in the Milken Institute’s report on the Best-Performing Cities 2020 back in February.
Since that report was published, the city has faced its own local outbreak of COVID-19. Like every other major American city, the job loss has been heavy. However, there are always reasons for optimism about the San Francisco real estate market:
Effective Response to COVID-19
San Francisco was one of the earliest American cities to adopt aggressive social distancing orders in response to the Coronavirus. We have seen widespread acceptance of these measures among residents. As a result, the city has an extremely low mortality rate. Of the 2,408 reported COVID-19 cases in San Francisco, only 40 people have died as of May 2020, which is a 1.66% mortality rate. (By comparison, New York City has had 16,410 deaths from over 199,000 total cases, or an 8.2% mortality rate.) Because San Francisco has been so effective in managing the pandemic, many types of businesses are now permitted to reopen. In short, there are many encouraging signs for the local economy.
Big Tech Dominance
First of all, most of the biggest tech companies have reached record stock prices since the pandemic began. This can be measured by the performance of the NYSE FANG+ index, which includes the three companies given above and other Bay Area giants, including Netflix, Tesla, and Twitter. At a time when many Bay Area tech workers are losing their jobs, these companies are hiring aggressively.
Tech’s Continued Strength
Beyond the big tech brands listed above, the San Francisco Bay Area is home to many others that are thriving. Companies like Slack and Zoom are seeing incredible demand for their products at a time of more remote work. While not all local companies are as well-positioned for the present moment, we are confident the Bay Area will remain a thriving economic hub.
Finally, San Francisco is a worthwhile place to invest because of its amazing culture and natural beauty. San Francisco is a diverse, international city in which anyone can find a place to call home. This is in part due to strong ethnic communities around the city, including Chinese, Japanese, Korean, Vietnamese, Filipino, and Russian. There, your native language is likely to be spoken, and you as a homeowner will feel accepted.
At the same time, the range of cultural attractions in the city and wider region is truly unique. San Francisco is home to 37 Michelin-starred restaurants, world-leading museum collections (including SFMoMA and the Asian Art Museum), and famous attractions like Fisherman’s Wharf and the Golden Gate Bridge. The city also contains a countless breathtaking parks and beaches, and is a short drive to the Marin Headlands, the Wine Country of Napa Valley and Sonoma, and other destinations. Lastly, San Francisco International Airport (SFO) offers direct service to almost 140 domestic and international locations. This truly is a world-leading city.
Whether you are looking to buy a primary residence or a rental property, this is an exceptional opportunity to consider San Francisco.
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